The devastating floods wiped out nearly 2 percentage points from the GDP growth last fiscal year; the war on terror roughly caused another 1.5 percent to the GDP growth. Both these issues required either relief measures or strategic decisions to minimise the damage and build for the future.
Energy shortage has cost the country nearly the same, 2 percent of the GDP according to the Institute of Public Policy, but there have been little to zero efforts to address the issue on war footings. The energy problem is so complex that it is hard to pin point a starting point. For simplicity sake, let us consider the energy mix, which is the core of the problem. If Pakistan's present energy mix remains in status quo, the future will see a horrifying series of crisis.
In a time, when leading emerging economies of the world have diversified their energy mix by exploiting the indigenous resources to optimal potential - Pakistan falls miserably behind being over dependent on oil and gas contribution for massive energy needs that are expected to multiply in the years to come.
Pakistan's gas production has largely remained flat in the past few years due to a variety of reasons, amongst which, the slowdown in drilling activities is a major one. The biggest impediment towards investment in exploration activities is the ever deteriorating law and order situation in KP and Balochistan. Both provinces are believed to have immense potential reserves, especially Balochistan which has a large sedimentary area. But it remains untapped, as the government's writ is largely absent from the province, an element that acts as deterrent to both local and foreign investors. Oil and gas exploration is a risky as well as capital and technology incentive business, which naturally requires monetary incentives too.
Although, Pakistan has a well established petroleum policy that lays down the dos and donts clearly - it lacks the financial incentives to lure big players in enhancing their presence in the country. Gas pricing in Pakistan has often been criticised heavily by energy experts and rightly so, as it kills the incentive for bigger players to tap the potential.
The authorities have long been complacent especially about gas pricing as adequate measures were not taken in time to address the demand-supply gap which is widening by the day. The wellhead prices offered by the government to exploration companies are at a steep discount to international rates, which is why the foreign investors are reluctant to expand the operations in Pakistan.
Ideally, there should be a considerable security premium attached to wellhead prices, but the situation is exactly the reverse, as the investors find better alternates in the region, where they are offered better pricing at a considerably low risk.
'GAS-FOR-ALL' WON'T WORK
Another issue is that of the demand side management which arises primarily because of the 'gas-for-all' policy, with the domestic sector sitting on top of the priority list. Domestic sector consumes around 17 percent of the total and its share in the pie has been increasing since many years. Natural gas used for domestic purposes yields much lower thermal efficiency.
To add to the misery, domestic consumers enjoy natural gas at a heavy discount to industrial and commercial users, discouraging careful use of the important natural resource. Critics have long been arguing that natural gas should be priced higher for the domestic sector and be allowed only for cooking purpose. The government's reaction so far has been nothing beyond acknowledgement and a few plans on paper.
Another case of flaws in gas usage prioritisation is the liberal CNG policy, which has made Pakistan the country with the highest number of vehicles running on natural gas in just five years.
The share of CNG in the consumption pie has increased from 2 percent in FY05 to nearly 10 percent by FY11. Not only does it defy the logic of targeted subsidy as it is meant for the middle and upper-middle class, but also deprive the industrial sector which has to face gas curtailment on a routine basis, affecting the productivity.
The Integrated Energy Plan 2010-2025 prepared by The Energy Expert Group, recommends removal of all subsidies including the fertiliser and domestic sector, reduction in UFG losses on part of the distribution companies, discouraging CNG by narrowing the price gap with petrol and most importantly bringing price parity between competing fuels.
Pakistan will soon be relying on imported gas in the form of LNG and LPG to meet its energy requirements, as there is no other short term alternative available. But for that to happen, it needs to rationalise the gas tariffs as imported gas would be at much higher tariffs, unless Pakistan decides to raise the domestic tariffs, it would not be able to import gas, which could cast a disaster spell to the country's energy picture.
POWER NEEDS REFORMS
"Light aa gai" is a phrase that is heard every two hours in most parts of the country. The electricity woes have gone from bad to worse in the past few years as it is considered weird if load shedding does not exceed 8-10 hours a day. The problems are numerous and widespread from capacity constraints to inefficiency to circular debt. First and foremost, there is a need to expedite the installation of IPPs with proper planning and care so that the RPPs like mistakes are not repeated.
In the medium term, experts suggest that electricity generation should be added in large clusters of 3000-4000 MW in line with 'least cost expansion plan', which addressed the issue of electricity fuel mix. Pakistan's electricity generation is heavily tilted in favour of thermal generation, which puts added pressure on the discos as the high cost of electricity often results in a chain that is commonly known as the circular debt.
In the longer run, Pakistan has no option but to go for coal and hydel based electricity generation. The 'Integrated Energy Plan' says that Pakistan at any cost must have 17392 MW hydel, 10000 MW coal and 17400 MW of renewable electricity generation by 2020.
No matter, how elite the panel of energy experts is on the board, these numbers are a far-fetched dream disassociated with reality as the projects would require nothing less than $50-55 billion, according to experts.
Agreed, that the generation mix has to improve, but for that Pakistan might have to rely on a large number of small dams rather than the other way round. Thar Coal project ahs to take shape immediately and the LNG imports also need to be processed soon. On the efficiency side, the government has already revamped the boards of discos, but that alone will remain a cosmetic measure unless more concrete steps are taken to address the real issue of transmission and distribution inefficiency.
Rationalisation of tariff is the need of the hour and the government needs to show the political will to take brave measures. Experts argue that the tariff should be rationalised in such a way that high consumption domestic consumers end up paying more for heavy appliances so as to curtail overall consumption and increase revenues.
There is a dire need to revamp the collection system, as delays in bill payments further ignite the circular debt problems which affect the entire energy chain from upstream to the bottom. In a nutshell, it would not be an overstatement to say, Pakistan needs to declare 'energy emergency' and work relentlessly to improve the situation or else it will continue to haunt the economy.
The writer is a Research Analyst at BR Research. He can be reached at zuhair.abbasi@br-mail.com
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